New York State’s new Attorney General, Eric T. Schneiderman, who took office on January 1, 2011, recently announced the formation of a Taxpayer Protection Unit (“TPU”), which will target corrupt contractors, pension con-artists, and “large-scale tax cheats.” A.G. Schneiderman announced that he expects the new TPU to “leverage” the increased powers – and the huge financial incentives offered to private “whistleblowers” – provided by the 2010 amendment to the state’s False Claims Act, which added to the arsenal of the Attorney General the power to “crack down on large-scale, multi-state corporate tax fraud schemes.”
New York’s False Claims Act, in existence only since 2007, allows the Attorney General to recover treble damages, plus penalties, attorneys’ fees and costs, from anyone found to have submitted a “false claim” for money or property to state government. A “false claim” is “any request or demand … for money or property … made to any … agent of the state or a local government …” which is “false or fraudulent.” State Finance Law §§ 188(1) and (2). While the statute originally barred claims based on violations of the tax laws, the 2010 amendment removed that bar, and the statute now covers claims under both state and local tax law if the person or entity pursued has annual “net income or sales” of at least $1 million, and the “damages pleaded” by the plaintiff exceed $350,000. State Finance Law § 189(4).
The law also allows private citizens to bring actions. State Finance Law § 190(2). These are referred to as qui tam suits, based on a Latin phrase often translated as “who as well for the king as for himself sues in this matter.” Any person may bring such an action, although a plaintiff is required to first serve the complaint and all material evidence on the Attorney General. The complaint and evidence are sealed for a minimum of 60 days, to allow the State Attorney General to investigate, and to provide a copy to the local government if a violation of local tax law is also alleged. The Attorney General must then investigate and consult with the Commissioner of Taxation, and the local official if a local claim is raised, and can
The Attorney General expects the new TPU to “leverage” the increased powers -- and the huge financial in centives offered to private “whistleblowers” -- [under the amended] False Claims Act
then decide to take over the action by filing a complaint, or can intervene in the action, or can decline to participate, in which case the qui tam action proceeds as between two private parties – the whistleblower and the accused. While a qui tam action cannot proceed if it is based on allegations that are already the subject of a pending administrative action, the statute provides that the Attorney General may pursue other remedies, including administrative proceedings, which would appear to authorize actions to proceed in the Division of Tax Appeals even if a qui tam action was already proceeding in court. State Finance Law §§ 190(5)(c), (9)(a). It is also important to note that the statute of limitations for initiating a qui tam action is 10 years, meaning that an action must be brought no later than 10 years after the date on which the challenged act was committed. State Finance Law § 192(1).
The statute holds out the possibility of dramatic financial rewards to the qui tam plaintiff, who stands to receive a percentage of the amount for which a defendant is ultimately held liable. That amount is not simply the unpaid tax, since a defendant found to have committed a violation can be held liable for three times the amount of damages sustained, plus penalty of between $6,000 and $12,000 for each violation. State Finance Law § 189(1). Out of this trebled amount, the whistleblower may receive between 10 and 25 percent of the proceeds if the Attorney General converts the qui tam action into an Attorney General enforcement action or elects to intervene, and between 25 and 30 percent of the proceeds if the action goes forward without the State or local government as a party. State Finance Law § 190(6). The court may also award costs, expenses, disbursements and attorneys’ fees to a prevailing government or private party, over and above the proceeds.
Additional Insights. It is entirely possible that the expanded False Claims Act will lumber along without any noticeable activity for many years. It is also possible, given the $10 billion deficit faced by the State, and the financial rewards to whistleblowers, that it will result, quite soon and quite dramatically, in a barrage of claims and high-profile lawsuits. By forming the new TPU, the Attorney General has signaled that he intends to devote resources to investigating and pursuing such claims. The standard for invoking the law – a defendant with $1 million in sales, and potential damages of over $350,000 – is a modest threshold and one sure to be met by virtually any medium-sized company on most state tax issues. The ability of qui tam plaintiffs to obtain cash rewards of as much as 30 percent of the full amounts paid, including treble damages and penalties, is a strong incentive that may induce lawsuits involving many state tax issues that otherwise may never have seen the light of day, possibly arising from claims by disgruntled former employees who have been downsized out of jobs. Remarkably, even if the court finds that the person who brings the action was involved in planning or initiating the violation, that person may still receive a financial reward, unless convicted of criminal conduct, although the court “may” (not “must”) reduce that person’s share of the proceeds “to the extent the court considers appropriate.” State Finance Law § 190(8). Plaintiffs’ law firms’ websites already invite contacts from those with knowledge of “tax fraud,” mentioning as possible grounds for suit such scenarios as concealing off-shore accounts, claiming improper exemptions, failing to remit sales taxes that have been collected, or hiring workers off the books, and at least one firm provides a form for potential plaintiffs to fill out and send back electronically.
There are many unanswered questions regarding how this new broadened law will apply to taxpayers who have filed tax returns claiming particular positions. For example, there is no requirement that a specific intent to defraud be proved, only that the person acted “knowingly” in filing the alleged false claim. While mistake and “mere negligence” are excluded (State Finance Law § 188(3)(b)), the reach and applicability of state tax statutes is often a highly disputed issue. Will companies be found to have filed false claims “knowingly” if they are aware, at the time they take a position on a return, that the Department of Taxation and Finance takes a contrary position on an issue? Will it matter if there is full disclosure? Does this mean a taxpayer that seeks to challenge a regulation – which can be set aside by the courts if it exceeds the scope of a statute – could face a claim that it
even if the court finds that the person who brings the action was involved in planning or initiating the violation, that person may still receive a financial reward
“knowingly” violated the law if it loses? Would a taxpayer be better off not even requesting formal guidance in an unclear area, and proceeding with its position in the absence of any rules, in order to avoid a claim later that it acted “knowingly” if it receives adverse guidance that it believes is incorrect? And if so, is that really good tax policy?
Another of the many open questions involves the 10-year statute of limitations, which runs from the date of the alleged violation. That time period is much longer than the ordinary statute of limitations in New York, which is generally three years, with the possibility of extension to six years if there has been a substantial understatement. By the time a qui tam claim surfaces, records may well have been destroyed in the ordinary course of business, and any provision for a potential assessment may have been removed from a company’s financial statements as the standard statute of limitations closed.
The possibility of such suits also raises a disturbing question about privacy. New York’s tax law contains strict protections for taxpayer secrecy. For example, hearings on tax matters held at the Division of Tax Appeals are closed to the public, and there is no public record that a case is even being litigated unless and until an Administrative Law Judge decision is entered. Here, once a complaint has been unsealed, which may be as soon as 60 days after filing, it will presumably be publicly available, giving qui tam plaintiffs another potential threat to hold over the heads of potential defendants.
According to information provided by the Attorney General’s office, the 2007 version of the statute, which did not apply to tax claims, gave rise to recovery of “hundreds of millions of dollars,” primarily involving Medicaid claims. While the new expansion of the statute to cover tax claims may well result in a similar barrage of lawsuits, it will be some time before we know whether the complicated nature of state tax filings, the lack of clarity in tax provisions, and the many procedural questions lead to a different, and perhaps less straightforward, result in the tax area.